I have written about this in Swedish before, but I think it may be of interest to non-Swedes as well. – For the sake of simplicity (or out of laziness), I keep the examples in Swedish currency. The exchange rate between Swedish kronor (SEK) and US dollars is currently 8.5 SEK per dollar.

Suppose you are a young child and your parents give you pocket money in the form of a weekly allowance of 200 kronor. However, every week your father hands you 300 kronor and immediately takes 100 kronor back. When you ask: “Dad, why on earth do you do this?”, he answers: “Those 100 kronor will go to paying your next weekly allowance”.

This could be described as you, the child, getting an allowance of 300 kronor, of which you pay a third back in “income tax”. But of course, no child would be fooled by this reasoning. Only adults can be that foolish.

Now, back to real life:

For the last 25 years I have worked for the Swedish government, as a librarian (“second assistant”) in the Swedish Royal Library.[1] (Before that, I worked for some years as a school teacher, which is also a job in the public sector.) For this work I receive a monthly salary, on which I allegedly pay approximately a third in income tax. So, every month, I get a slip of paper in my mail, saying that I have received (approximately) 21 000 kronor, from which 7 000 kronor are deducted as tax, so that I actually get 14 000 kronor into my bank account.

But where are those 7 000 kronor? They exist only in the form of a figure on a slip of paper!

By contrast, if I earned the same amount of money from a job in the private sector, then a third of my income would actually go to the government in the form of income tax. In terms of time, it would mean that I work a third of the year for the government and two thirds for myself and/or my family.

This income tax money goes to defraying government expenses, part of which is of course paying the salaries of government servants (such as second assistant librarians at the Royal Library). But when I, a government servant, pay a third of my income as income tax, this money also goes to paying the salaries of government servants – which means, in effect, that I supposedly pay the government 7 000 kronor a month, which then goes to paying my salary for the next month! Exactly as in the fictional example I started out with.

Obviously, this “income tax” I am paying is entirely fictional. The government could just as well pay me 14 000 kronor and take no tax at all; it would make no difference.

But suppose the income tax is raised to, say, 50%. (The public sector is expanding; the government needs more servants and more money to pay their salaries.) For those of you who work in the private sector, this would mean you now work half of your time for the government instead of just one third; but I am a government servant and already work 100% of my time for the government. The change for me would be that I now only receive 10 500 kronor in take-home pay. If the fiction of me paying an income tax is removed, it would simply mean that I now have a lower monthly salary, which is of course exactly what I have. And the situation would be the same, if the tax were raised to, say, 90%. The actual outcome is that I will now receive 2 100 kronor in take-home pay, which, of course, I could not live on.

But the government certainly does not want to treat its servants that unkindly. So in order to compensate me (us) they have to raise our pay. In the 50% case above, this would mean that my “before tax” income would have to be raised to 28 000 kronor. In the 90% case, it would have to be raised to 140 000. But this tax is as fictional as before. I won’t suffer from the raised tax, but everyone who works in the private sector will.

But say there is a genuine tax reform and income tax is lowered to 10%. Now, my take home pay will be almost 19 000! But who is paying for my raised income? Not me: the 2 100 I allegedly pay is still only a figure on a slip of paper. No, the pay raise is paid by the taxpayers in the private sector. But wait a moment – their taxes have just been lowered to 10%! The government after this tax reform will not have enough money to pay its servants’ salaries! Government servants (including second assistant librarians) will have to be fired! Or else, my “before tax” pay will have to be lowered so my take-home pay still stays at 14 000. But even so, the government now has much less money to pay in salaries. It won’t be able to pay me my 14 000 either.

This is of course the reason why such drastic tax cuts are never made. They are simply not affordable, from the government’s point of view. (Such tax cuts of course would have to be made in conjunction with a radical slimming of the public sector – libraries and schools, along with many other things, would have to be privatized.)

Why, then, is this fiction being maintained? Well, I think it is sheer hypocrisy. People with statist inclinations simply want us to believe that we are all taxpayers, although some of us clearly aren’t.

To illustrate the hypocrisy: one Swedish politician (Mona Sahlin, who was from 2007 to 2011 the leader of our Social Democratic party) a few years ago made a statement to the effect that she, personally, loved to pay taxes! Paying taxes was the best thing in life! And so, everybody else should love it, too.

But there is no slightest difference between me and Mona Sahlin, except this one: her income is exorbitant, compared to mine. Her “taxes” are as fictional as mine. She loves paying taxes that in actual, sober fact don’t exist.

But what would happen if this plain fact were simply acknowledged and we public servants actually did not have to pay those taxes we do not really pay anyway? Well, there might be a public outrage, as people now would see clearly what the fiction is intended to hide: that some of us don’t pay taxes. The whole public sector would be seen as parasitical (which, to a great extent, it certainly is). The result might be a tax revolt.

Now, I certainly don’t regard myself as a parasite because of my work. Libraries are an important part of civilization, and so are schools (although I say the last with some hesitation, considering the sorry state of our educational system). In an ideal laissez-faire society, such institutions would be privately owned and maintained. But unfortunately, I live in this century, not in some future utopia – so this is not something I should accept unearned guilt for.

In feudal times members of the nobility were tax exempt. But they were so, because they performed another service to the country (or “society at large”, to use the common collectivist catch-phrase) – they were supposed to take part in warfare, whenever there was a war.

Today, many public servants (librarians and school-teachers are examples) do perform a valuable service and of course should be paid for it. It would be unfair to call them “parasitical”, just because they work in the public sector and are paid with tax money. Teachers can of course try to find work in private schools. But I don’t think this is a possibility for librarians – at least not here in Sweden.

So there is no reason for feeling bad about working in the public sector – at least not for us who are also fighting for a future of limited government. But we should not pretend that we are taxpayers – neither me nor Mona Sahlin.

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There is another, “macro-economic” point: although this tax money is entirely fictional, I believe it is still counted when national income or GDP is calculated. Obviously, the figures have to be overstated if fictional money is included.

[1] This was originally written shortly after I retired in 2009 (Swedish law does not allow me to work past the age of 67). My reasoning also applies to the alms I receive as a pensioner, although the amount is smaller.

That taxing the poor makes the poor even poorer is not exactly rocket science. It would be a great boon to the poor man if the income tax and the value-added tax were simply abolished. In Sweden (and I believe in most countries) alcoholic beverages and tobacco products are heavily taxed; those taxes obviously hurt the poor much more than the rich: the poor man may have to quit drinking and smoking just to be able to afford his daily food and paying the rent for his apartment; while the rich man may enjoy his vintage wines and his Habana cigars without it making a dent in his fortune. (In the category of “rich” are also included the politicians who levy the taxes.) The rationalization for this is that it is necessary to preserve the poor man’s health.

At least here in Sweden, gasoline and electricity are also heavily taxed; this is part of the effort to “save the planet” from the results of industrialization. The relatively poor – those who can at least afford a car – are made to pay extra for driving to and from their work; but it does not make a dent in the fortune of Al Gore, who is able to afford a well-lit mansion and to drive in a limousine or fly by private airplane while traveling the world to preach austerity to the rest of us.

But what about exclusively taxing the rich and hand the money out to the poor (after a handsome deduction for paying the politicians and their henchmen other public servants)? Here is a quote from Ayn Rand:

In view of what they hear from the experts, the people cannot be blamed for their ignorance and their helpless confusion. If an average housewife struggles with her incomprehensibly shrinking budget and sees a tycoon in a resplendent limousine, she might well think that just one of his diamond cuff links would solve all her problems. She has no way of knowing that if all the personal luxuries of all the tycoons were expropriated, it would not feed her family – and millions of other, similar families – for one week; and that the entire country would starve on the first morning of the week to follow. […] How would she know it if all the voices she hears are telling her that we must soak the rich?

No one tells her that higher taxes imposed on the rich (and the semi-rich) will not come out of their consumption expenditures, but out of their investment capital (i.e., their savings); that such taxes will mean less investment, i.e., less production, fewer jobs, higher prices for scarcer goods; and that by the time the rich have to lower their standard of living, hers will be gone, along with her savings and her husband’s job – and no power in the world (no economic power) will be able to revive the dead industries (there will be no such power left). (“The Inverted Moral Priorities” in The Voice of Reason, p. 274.)

This is what taxing the rich will inevitably accomplish: less investment, fewer jobs, higher prices, scarcer product, and in the end (if practiced consistently enough) starvation.

The progressive personal income tax, the corporate income tax, the inheritance tax, and the capital-gains tax are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.

By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers’ goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers’ goods. This implies a reduction in the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. The individual and corporate income taxes, and the capital-gains tax, of course, also powerfully reduce the incentive to introduce new products and improve methods of production. In all these ways, these taxes undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living of everyone, not just of those on whom the taxes are levied.

And later on:

Starting with tax cuts for the so-called rich — based on equivalent reductions in government spending — is the only hope for the resumption of significant economic progress, indeed, for the avoidance of economic retrogression and growing impoverishment. Because of this, it is actually the quickest and surest road to any major reduction in the tax burden of the average wage earner. It holds out the prospect of the average wage earner being able to double his standard of living in a generation or less. The average standard of living would double in a single generation if economic progress at a rate of just 3 percent a year could be achieved. Such economic progress would also mean a halving of the average wage earner’s tax burden in the same period of time — if government spending per capita in real terms were held fixed, for then he would have double the real income out of which to pay his present level of taxes. And then, of course, once all the taxes that most stood in the way of capital accumulation and economic progress were eliminated, further reductions in government spending and taxation could and should take place that would be of corresponding direct benefit to wage earners, that is, show up in the reduction of the taxes paid by them.[1]

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But if there should be no taxes on the poor and no taxes on the rich, what taxes should there be? Who, then, should pay the salaries of our politicians and their henchmen other public servants? Or should there be no politicians and no government at all? Should the proper functions of government (as some anarcho-capitalists suggest) be taken over by insurance companies? At least, they would not levy taxes but be paid voluntarily.

Well, as you probably know, Ayn Rand addresses this question in her essay “Government Financing in a Free Society” in The Virtue of Selfishness. I quote parts of it:

In a fully free society, taxation – or, to be exact, payment for governmental services – would be voluntary. Since the proper services of a government – the police, the armed forces, the law courts – are demonstrably needed by individual citizens and affect their interests directly, the citizens would (and should) be willing to pay for such services, as they pay for insurance.

And here is her proposal:

As an illustration (and only as an illustration), consider the following possibility. One of the most vitally needed services, which only a government can render, is the protection of contractual agreements among citizens. Suppose that the government were to protect – i.e., to recognize as legally valid and enforceable – only those contracts which had been insured by the payment, to the government, of a premium in the amount of a legally fixed percentage of the contractual transaction. Such an insurance would not be compulsory; there would be no legal penalty imposed on those who did not choose to take it – they would be free to make verbal agreements or to sign uninsured contracts, if they so wished. The only consequence would be that such agreements or contracts would not be legally enforceable; if they were broken, the injured party would not be able to seek redress in a court of law.

And later on:

When one considers the magnitude of the wealth involved in credit transactions, one can see that the percentage required to pay for such governmental insurance would be infinitesimal – much smaller than that paid for other types of insurance – yet it would be sufficient to finance all the other functions of a proper government.

And:

Men would pay voluntarily for insurance protecting their contracts. But they would not pay voluntarily for insurance against the danger of aggression by Cambodia. […] A program of voluntary government financing would be amply sufficient to pay for the legitimate functions of a proper government. It would not be sufficient to provide unearned support for the entire globe.

And I have to quote this paragraph:

It may be observed, in the example given above, that the cost of such voluntary government financing would be automatically proportionate to the scale of an individual’s economic activity; those on the lowest economic levels (who seldom, if ever, engage in credit transactions) would be virtually exempt – though they would still enjoy the benefits of legal protection […] These benefits may be regarded as a bonus to the men of lesser economic ability, made possible by the men of greater economic ability – without any sacrifice of the latter to the former.

So under this proposal, the taxes would, predominantly, maybe even exclusively, be paid by the rich. But it certainly wouldn’t have the effects that taxes on the rich have today.[2]

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What, then, are the chances of such a tax reform ever being implemented? Pretty slim, I would say. In today’s world, non-existence. But maybe in some distant future. As Ayn Rand writes in her essay

…the principle will be practicable only in a fully free society, a society whose government has been constitutionally reduced to its proper, basic functions. […] Any program of voluntary government financing is the last, not the first, step on the road to a free society – the last, not the first reform to advocate.

If we were to argue for such a reform today, would the politicians even listen?

One obvious stumbling block[3] is that a fully free society would mean fewer politicians and government employees than we have today – fewer by a large extent. Would today’s politicians and government officials voluntarily step down, take their place in the market economy and leave the rest of us alone and only interfere in our lives when our rights have been violated?

A political career is quite lucrative today. Politicians grant themselves quite handsome salaries – and when they are voted out of office (which does happen, sometimes), they also grant themselves quite handsome pensions; they do not even have to begin looking for other jobs, if they don’t feel like it. And if they do feel like it, they take well-paid jobs as lobbyists, without having to relinquish their handsome pensions. (At least, this is the case here in Sweden, but I do not think it is much different in the rest of the Western world.) With a government “constitutionally reduced to its proper, basic functions”, this would not be possible.

So, judging by the situation today, I have to be pessimistic. And the distant future is – well, distant.

[1]) This part of the essay is adapted from Capitalism: A Treatise on Economics, p. 308-310.

[2]) Ayn Rand’s essay does not seem to be available on the web, so you will have to buy the book. – There is a good elaboration on her essay by Craig Biddle of The Objective Standard; if you are not a subscriber, you can download it for the modest price of $3.95.

[3]) Another stumbling block is (to use George Reisman’s words) “massive ignorance of economics”. It will take, at best, a generation to uproot “mainstream” economics and replace it with sound, “Austrian” ideas.